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Apparel Industry Issues Dire Warning: Prices Going Up · Bloomberg Intelligence

0:02
Speaker 1: Welcome to the Bloomberg Penel podcast. I'm Paul swing you
0:05
Speaker 1: along with my co host Lisa Brahma Waits. Each day
0:07
Speaker 1: we bring you the most noteworthy and useful interviews for
0:10
Speaker 1: you and your money, whether at the grocery store or
0:12
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
0:15
Speaker 1: podcast or wherever you listen to podcasts, as well as
0:17
Speaker 1: at Bloomberg dot com. It's a big week for retail
0:22
Speaker 1: We did get earnings from Macy's today, We're expecting j C.
0:25
Speaker 1: Penny as well as Walmart and Target all later in
0:29
Speaker 1: the week. And of course these earnings come with a
0:32
Speaker 1: backdrop of potential tariffs. President Trump did delay some of
0:36
Speaker 1: the additional tariffs they p planned to impose on goods
0:39
Speaker 1: from China to December from September, but still the mood
0:44
Speaker 1: is highly wary among retailers. Joining us now as Rick Helfenvine,
0:48
Speaker 1: he's president and CEO of American Apparel and Footwear Association.
0:52
Speaker 1: He's joining us from Las Vegas during a convention there,
0:56
Speaker 1: and Rick, thanks for being with us. Let's start with
0:59
Speaker 1: the convention with the with the mood that you're hearing
1:02
Speaker 1: from the retailers in attendance today, Well, storm clouds over
1:07
Speaker 1: the port bow. I'm telling you, I'm here in Las Vegas.
1:11
Speaker 1: Ninety thousand people come to our semi annual industry trade
1:15
Speaker 1: show called the Magic Show, and they're buying and they're crying.
1:20
Speaker 1: Nobody is happy. Um. Yesterday, early in the morning, we
1:24
Speaker 1: thought we had some terrific news from the administration. We
1:28
Speaker 1: thought the Grin should finally spirit our Christmas season. But
1:33
Speaker 1: later in the day, as the lists they called him
1:36
Speaker 1: for A and four be started to pop out, we
1:39
Speaker 1: realized we really weren't in much better shape. Seventies seven
1:42
Speaker 1: percent approximately of the goods that we bring in for
1:46
Speaker 1: the holiday season will be hit by tariffs I have
1:50
Speaker 1: on September one. It's not a pretty picture. People are scrambling.
1:55
Speaker 1: And the reason least that it affects our industry so much,
1:59
Speaker 1: is it quite simply fortable of parallel of or We're
2:05
Speaker 1: eighty four percentable accessors, including backpacks and hand babs come
2:09
Speaker 1: from China and we don't really have a place to
2:11
Speaker 1: move it. So someone's got to pay these tariffs. We've
2:15
Speaker 1: been telling the administration over and over and over again,
2:18
Speaker 1: please don't do this, Please don't hit the consumer so
2:24
Speaker 1: the question is will it hit the consumer, will it
2:27
Speaker 1: hit the retailers? How much will we pass along to
2:30
Speaker 1: consumers versus sucked up by the retailers. Well, you know
2:34
Speaker 1: a lot of smart people in our industry and I
2:36
Speaker 1: speak to them regularly. No, no tariff is a good
2:41
Speaker 1: tariff ten percent? You know, maybe it's survivable, but is not.
2:48
Speaker 1: And every time the President has said ten percent, it
2:51
Speaker 1: goes to So we're anticipating the worst, not the best.
2:56
Speaker 1: We'll do the best thing that we possibly can to
3:00
Speaker 1: you know, avoid earnings compression. But you know what, the
3:04
Speaker 1: end results gonna be loosing. Honestly, Prices are gonna go up,
3:08
Speaker 1: sales are going to go down. Jobs are gonna get lost.
3:10
Speaker 1: It's not going to be a pretty time. It's gonna
3:12
Speaker 1: be retail ugly for our industry. That's what's unfortunately gonna happen.
3:18
Speaker 1: And we told them, we told them, we're telling them.
3:21
Speaker 1: Nobody's listening, and you know, you don't want to hear
3:23
Speaker 1: something really sad um. Approximately of all newborn, infant and
3:30
Speaker 1: todblet goods sold in the United States is ten dollars
3:33
Speaker 1: or less, and they're gonna get hit with a tariff
3:36
Speaker 1: September one percent. What is ten percent due to ten dollars?
3:40
Speaker 1: I mean, think about what we're doing where they exempted
3:45
Speaker 1: car seats but not children's clothes. I mean crazy stuff.
3:49
Speaker 1: I will say that one important thing for me when
3:52
Speaker 1: my child children were babies was to buy those ten
3:55
Speaker 1: packs of ones Ease and then be able to if
3:57
Speaker 1: they if they had an issue, just simply throw it
4:00
Speaker 1: out that having to worry about it because it was
4:02
Speaker 1: five dollars for ten onesies or whatever else. But Rick,
4:04
Speaker 1: you know, I want to I want to talk into
4:06
Speaker 1: all seriousness looking forward at some of the retailers and
4:10
Speaker 1: how they're adapting to this scenario. Some people would push
4:12
Speaker 1: back and say, why is so much of the apparel
4:15
Speaker 1: manufactured over in China? Why can't the supply chain be moved? Well,
4:20
Speaker 1: you know what, our retail consumer for the last several years,
4:24
Speaker 1: particularly the millennial customer, is very conscious about product quality,
4:29
Speaker 1: product safety, um sustainability, environment, workers, right to human rights.
4:34
Speaker 1: And we've been able to do that in China and
4:37
Speaker 1: do it effectively, whereas when we go outside of China
4:40
Speaker 1: it becomes a much more difficult gold to attain. The
4:45
Speaker 1: Chinese have been extremely efficient to work with so they
4:50
Speaker 1: really generally meet the high expectations of the American market.
4:54
Speaker 1: So what's the administration telling us? They're telling us point
4:58
Speaker 1: blank get out of China. So where are we gonna go?
5:02
Speaker 1: You know? Number two places Vietnam. The presidents threatened them
5:05
Speaker 1: with tariffs. Number three is India. He's threatened them. We
5:09
Speaker 1: don't even have a second choice. So, um, we're in
5:13
Speaker 1: a tough spot. We're gonna we're gonna work through it
5:16
Speaker 1: at ten percent. If it goes to at least, I
5:18
Speaker 1: don't know what's going to happen. So Rick, it's been
5:21
Speaker 1: a pretty gloomy Wednesday. A lot of people talking about
5:23
Speaker 1: the worst case scenarios. You're definitely piled on there. But
5:26
Speaker 1: you are in Vegas and you're at this huge trade show.
5:30
Speaker 1: Anything getting excited today? Um? Yeah, I mean it's funny.
5:36
Speaker 1: It's funny. I'm winning hand. Um, it's positive. There's a
5:40
Speaker 1: lot of people, here's a lot of activities, a lot
5:42
Speaker 1: of buying going on. On the other hand, people are worried. So,
5:45
Speaker 1: you know, the economy finally got good, We're finally getting
5:49
Speaker 1: to where we're supposed to be, but you know, retail
5:51
Speaker 1: has been challenged. Leasa for the last couple of years
5:55
Speaker 1: ago back to two oh one seven, we had more
5:57
Speaker 1: bankruptcies than than two o eight. Uh. And then too,
6:00
Speaker 1: oh wait, you go to two o one eight, we
6:02
Speaker 1: lost over a million square foot of retail in this
6:05
Speaker 1: year to oh one nine. The first four months of
6:08
Speaker 1: the year, we had more announced store closings than all
6:12
Speaker 1: of the last year. So retail businesses a struggle. And
6:15
Speaker 1: then you you, you know, look as a as a
6:18
Speaker 1: bell weather for the economy, and you know, two thirds
6:22
Speaker 1: of our economy is based on the consumer. Ten percent
6:25
Speaker 1: of the jobs are in retail. We keep telling the administration, hey, great,
6:29
Speaker 1: you're talking to China. That's a good thing, but stay
6:32
Speaker 1: away from the consumer because we're the ones driving the
6:35
Speaker 1: economy and they we just worry the administration's getting bad advice.
6:40
Speaker 1: Rick helfan Bin, thank you so much for being with us.
6:42
Speaker 1: Have fun in Las Vegas. It sounds like perhaps another
6:45
Speaker 1: another go at the slot machines. Rick Helvin bine At,
6:48
Speaker 1: President CEO of American Apparel and Footwall Association, phoning in
6:51
Speaker 1: from Vegas. Thirty year yields in the US currently two
7:06
Speaker 1: point oh four percent, the lowest on record. Tumbling in
7:11
Speaker 1: the wake of fears of a recession of a global
7:14
Speaker 1: turndown as we do get weaker than expected manufacturing data
7:19
Speaker 1: out of China as well as the German economy shrinking
7:23
Speaker 1: in the second quarter. Joining us now Axel Mark, President
7:25
Speaker 1: and chief investment officer at MERK Investments, coming to us
7:29
Speaker 1: from San Francisco. Axel thank you so much for being
7:31
Speaker 1: with us. What do you make of these thirty year
7:33
Speaker 1: yields today? Great to be with you. Well, as you
7:37
Speaker 1: point out, they do reflect fears of a global slowdown. Um,
7:42
Speaker 1: the the biggest sue I have with all this coverage
7:45
Speaker 1: of the markets is that all the issues you're mentioning
7:48
Speaker 1: is are not issues the fit can fix. The fit
7:50
Speaker 1: cannot fix China, the fit cannot fix Germany, the fit
7:53
Speaker 1: cannot fix the trade war. And financial conditions are super easy,
7:58
Speaker 1: and so rate cuts I'm not the solution. The reason
8:01
Speaker 1: these long term rates are low is because obviously when
8:04
Speaker 1: you have a global trade war, the business sentiment is declining,
8:08
Speaker 1: and and yes, you're going to invest less when those
8:11
Speaker 1: sort of tensions are about, but you you're giving it
8:14
Speaker 1: the wrong medicine if you call for a right cut
8:16
Speaker 1: in the sort of environment. So if the FED can't
8:19
Speaker 1: do anything. Then are people not pessimistic enough? Um? Well
8:25
Speaker 1: are they? The question is what sort of pessimistm is there? Right?
8:28
Speaker 1: The U S economy is a fairly closed economy, um.
8:30
Speaker 1: The and if in many ways it's astounding how well
8:34
Speaker 1: the US economy has held up in light of all
8:36
Speaker 1: of this, Right, it's not. It's not a surprise that
8:39
Speaker 1: global businesses um face some headwinds. But consumers have been
8:43
Speaker 1: doing very well. Um. Indeed, as I may remind people,
8:47
Speaker 1: the unemployment rate is near a record low. Right. And
8:51
Speaker 1: also the the sort of challenges that we're facing. A
8:53
Speaker 1: tweet dependent tomorrow, the President could come out with a
8:57
Speaker 1: tweet and saying everything is great on the trade front, um.
8:59
Speaker 1: And then what then we're faced with potentially overheating economy.
9:03
Speaker 1: And here we are talking about the recession because maybe
9:06
Speaker 1: maybe somewhat terrors are going to be imposed. Now. What's
9:08
Speaker 1: happening is, of course, um, the inventories are being jolted
9:12
Speaker 1: around as people are holding things, and then maybe investments
9:15
Speaker 1: don't take place because of the uncertainty. So clearly that's
9:17
Speaker 1: the headwind. But again the FIT can't fix that. And
9:20
Speaker 1: that's also why the yield curve is not inverting the
9:22
Speaker 1: way historically inverts. Normally you would have the three year
9:26
Speaker 1: ten year in word and then gradually going from the
9:28
Speaker 1: kind of the three month tenure. This way, it's going
9:30
Speaker 1: the other way around. So we're imposing their recession the
9:33
Speaker 1: other way around around the FED tightening because of an
9:35
Speaker 1: overheating economy. It's the President inducing a slowdown with the
9:40
Speaker 1: tweets and and the trade tensions. And this is not
9:43
Speaker 1: this You don't need the same sort of cure to
9:46
Speaker 1: the disease because the disease is different. So I'm trying
9:50
Speaker 1: to put together a lot of what you're saying, and
9:52
Speaker 1: it's interesting, it's sort of a controversial issue. You're actually
9:55
Speaker 1: making an argument that the the U. S. Economy is
9:58
Speaker 1: closer to overheating then many people think, and that the
10:01
Speaker 1: FED should really respond to the economic data. That just
10:04
Speaker 1: isn't that that bad at this point? What are you
10:07
Speaker 1: looking at to indicate that we're closer to an overheating
10:11
Speaker 1: than anyone else who I speak to seem to think.
10:14
Speaker 1: I'm not saying this is the baseline scenario, but it
10:17
Speaker 1: is a risk not to be ignored. Right um, And
10:20
Speaker 1: and absolutely, the the the inversion of the yelk cuve
10:23
Speaker 1: is but one indicator that there's a slowdown. There's clearly
10:26
Speaker 1: global headwinds. But um, the difference I make is that
10:32
Speaker 1: we do have an election coming next year. The president
10:35
Speaker 1: will want to be re elected just like any president
10:37
Speaker 1: perfo him as well, so he wants to have a
10:39
Speaker 1: strong economy, and so he has every incentive in the
10:42
Speaker 1: world to reduce those straight tensions which I saw yesterday. Right,
10:45
Speaker 1: you can take some of these things off again very quickly.
10:48
Speaker 1: Questions how much damage will have been caused in the
10:50
Speaker 1: interim and and and what we can do about it.
10:53
Speaker 1: But the feder Reserve, in my view, would be very
10:55
Speaker 1: well served to to be data dependent and patient rather
10:59
Speaker 1: than be allowing political development. And nobody knows what the
11:02
Speaker 1: heck that even means. Instead, it's egging on the president
11:05
Speaker 1: to to escalate the trade war, and he did it
11:07
Speaker 1: the day after that was said. And so my view
11:10
Speaker 1: is that if the FED just took the long view
11:12
Speaker 1: on this and took a deep breath, Um, yeah, maybe
11:15
Speaker 1: the s MP would plunge more, But maybe that would
11:17
Speaker 1: send a signal to the White House and instead of
11:20
Speaker 1: the FED becoming a tool of the president. They suddenly
11:22
Speaker 1: don't want to become a tool. But Powell is exactly
11:25
Speaker 1: doing what what the President wants and and is egging
11:28
Speaker 1: him on in many ways. Axcel, just real quick here,
11:31
Speaker 1: what would you have to see to change your view
11:34
Speaker 1: and say, you know what, markets are right? The President
11:37
Speaker 1: is right, the Fed should cut rates well. Financial conditions
11:40
Speaker 1: need to deteriorate. Financial conditions is not the VIX index.
11:43
Speaker 1: The financial conditions is. And look at the financial the
11:46
Speaker 1: Chicago Fed Financial Conditions Index rather than most of the
11:49
Speaker 1: other ones that have too much weight on the VIX.
11:52
Speaker 1: You need to have a deterioration in the transmission channel.
11:55
Speaker 1: That is what the FEED should look at. Access to
11:57
Speaker 1: credit needs to become more difficult. You don't need to
11:59
Speaker 1: have the hiccup in d s MP. And so if
12:01
Speaker 1: that were to happen, lowing rates helped. Lowing rates doesn't
12:06
Speaker 1: do any good. And and that's why I'm not suggesting
12:09
Speaker 1: that is in the slowdown. But the FIT can't help
12:11
Speaker 1: the slowdown if we already have accommodative monetary policy. And
12:15
Speaker 1: so there's really nothing the FIT can do at this stage.
12:17
Speaker 1: And it would be very helpful for the FETE to
12:19
Speaker 1: just communicate what it can and cannot do. Yeah, axel Mark,
12:22
Speaker 1: thank you so much for being with us. Axel Mark,
12:24
Speaker 1: President and Chief Investment Officer at Merk Investments in San Francisco.
12:43
Speaker 1: We Work filed it's s one form ahead of its
12:46
Speaker 1: initial public offering today and our reporters an analysts have
12:50
Speaker 1: been parsing through the document. Quite a description of losses
12:55
Speaker 1: and also hope for community and what that could potentially
12:58
Speaker 1: reap in terms of joining us. Now, we're very lucky
13:01
Speaker 1: to say is Jeff lang Baum, his senior reat Sirie
13:04
Speaker 1: equity analyst for Bloomberg Intelligence, and Ellen Hewitt Startups reporter
13:08
Speaker 1: for Bloomberg News joining us from our Bloomberg nine sixties
13:10
Speaker 1: studio in San Francisco. Ellen, let's start with you. What
13:13
Speaker 1: do we learn today from the WE Work Companies I
13:17
Speaker 1: p O filing. There's so much to pass through. I'm
13:20
Speaker 1: still going through it, and I still have a lot
13:22
Speaker 1: to go through. I think the main story is, yes,
13:24
Speaker 1: this is a company with a lot of growth and
13:27
Speaker 1: a lot of losses. They have been losing, um, you know,
13:30
Speaker 1: close to two billion dollars in Those were numbers that
13:33
Speaker 1: we knew already, but we're starting to get a closer
13:36
Speaker 1: look at just how quickly it's growing and just how
13:38
Speaker 1: quickly it's losses are growing. And there's lots of other
13:41
Speaker 1: interesting information in there as well, in particular about the
13:44
Speaker 1: relationship between its CEO and co founder Adam Newman and
13:47
Speaker 1: the company. There's a lot of complicated financial structures that
13:50
Speaker 1: over the years we work has done to help support UM.
13:54
Speaker 1: Mr Newman and vice versa. There's this very close relationship
13:57
Speaker 1: with a lot of financial structures in there. So Jeff
14:00
Speaker 1: building on Ellen just said, we saw just how quickly
14:03
Speaker 1: their their revenues are growing and how quickly their losses
14:06
Speaker 1: are growing. At first blush. What's your big takeaway? Was
14:08
Speaker 1: this better than expected from your from your point of
14:11
Speaker 1: view or worse? UM? I would say probably about the same. UM.
14:15
Speaker 1: The one thing that really stood out to me was
14:18
Speaker 1: that it's it's not clear how they can continue to
14:21
Speaker 1: grow revenue the same magnitude that they've been growing it
14:25
Speaker 1: without also continuing to increase their costs. Right, because their
14:28
Speaker 1: revenue um grows when they add new incremental locations, and
14:32
Speaker 1: that's a costly endeavor, and so in order for them
14:37
Speaker 1: to approach profitability, they really have to I think scale
14:40
Speaker 1: back the the expansion um and and then that, you know,
14:44
Speaker 1: kind of gets you back to what's the valuation and
14:46
Speaker 1: how are we looking at this thing? Is it a
14:48
Speaker 1: high growth vehicle or is it an eventual profit generator? Ellen?
14:52
Speaker 1: This morning Tom Keene was parsing through the filing and
14:56
Speaker 1: he found numerous references the word community. I imagine it
15:01
Speaker 1: was over ten and I'm wondering what actually at its
15:04
Speaker 1: heart is this business, what is its competitive advantage and
15:09
Speaker 1: what will distinguish it from from from other companies that
15:11
Speaker 1: try to do the similar kind of thing. If you
15:14
Speaker 1: ask we Work, they'll they'll give you an answer that's
15:17
Speaker 1: that's pretty abstract. They talk about the idea of the
15:20
Speaker 1: power of we, and that's connected to this idea of community.
15:23
Speaker 1: It's this this sense of togetherness and and working together
15:27
Speaker 1: better and and it's part of this brand that we
15:29
Speaker 1: Work has really developed that they try to use to
15:32
Speaker 1: set themselves apart from your Regius or your other sort
15:34
Speaker 1: of stayed office providers. They really believe that building a
15:39
Speaker 1: global network of these flexible office spaces is going to
15:42
Speaker 1: provide something that is beyond just easy access to space.
15:46
Speaker 1: You know, they have a lot of enterprise customers that
15:49
Speaker 1: I imagine look at we Work as a very simple
15:52
Speaker 1: and easy way to, for example, set up a satellite
15:54
Speaker 1: office in a city where they maybe don't currently have
15:57
Speaker 1: a presence. It's much easier to do that by paying
16:00
Speaker 1: we Work, then by you know, hiring your own real
16:03
Speaker 1: estate team to go and look for places and signed
16:05
Speaker 1: a ten year lease and and that's maybe the more
16:08
Speaker 1: practical business application. But yeah, they talk about this idea
16:12
Speaker 1: of community being really central to what makes me work different.
16:14
Speaker 1: In fact, when they sold UM bonds last year for
16:18
Speaker 1: the first time, this was when we first encountered the
16:21
Speaker 1: infamous metric community adjusted EBIT, which many people mocked UM.
16:27
Speaker 1: But it's interesting that we Work chose that because it
16:29
Speaker 1: is indicative of how much they believe in this idea
16:31
Speaker 1: of community being central to uh their business. If you'll notice,
16:36
Speaker 1: community adjusted EBA does not in the s one, although
16:38
Speaker 1: I looked back at some of the draft versions and
16:41
Speaker 1: it isn't the first three draft versions of five, so
16:44
Speaker 1: some made it some of the way. Banker said, no way,
16:47
Speaker 1: are you subjecting yourself to that again, guys, no, just stop, Jeff,
16:52
Speaker 1: I do want to ask about the business model from
16:54
Speaker 1: a real estate perspective. I always am unclear of how
16:58
Speaker 1: much of we Work property is own versus least. What
17:01
Speaker 1: sort of the breakdown here the majority is least. They
17:05
Speaker 1: disclosed in the s one that they have forty seven
17:08
Speaker 1: billion dollars of lease obligation UM and that compares to
17:13
Speaker 1: four billion dollars of committed revenue backlog. So UM. You know,
17:18
Speaker 1: if and when we have a economic downturn that pulls
17:22
Speaker 1: tenants away from office space there on the hook for
17:26
Speaker 1: a lot more than what they are obligated to receive
17:30
Speaker 1: UM and and you know that this will that will
17:32
Speaker 1: really test the power of their community. How many of
17:35
Speaker 1: these tenants that are on short term leases with them
17:39
Speaker 1: stay UM as opposed to you know, pulling back and
17:43
Speaker 1: finding somewhere else to run their business. UM, if they
17:46
Speaker 1: don't need that cost, And then what does that mean
17:48
Speaker 1: for we Work going forward? Ellen, what's the what's their
17:52
Speaker 1: goal as far as how they plan to expand revenues here?
17:56
Speaker 1: You know, I think it's just continuing to look at
17:58
Speaker 1: growing in parts of the world where they don't have
18:01
Speaker 1: as big a presence. Commercial real estate is a huge
18:04
Speaker 1: addressable market. This is something that they always talk about
18:06
Speaker 1: when they're trying to make the pitch for why you
18:08
Speaker 1: should believe that this company is worth forty seven billion dollars,
18:12
Speaker 1: which was their most recent private valuation. They look to
18:15
Speaker 1: areas such as in South America and in Asia and
18:18
Speaker 1: point to, you know, the low penetration that their business
18:22
Speaker 1: has among you know, the office real estate market, and
18:26
Speaker 1: and they say, look, we've really figured out how to
18:29
Speaker 1: retrofit and fit out with furniture and office very quickly,
18:32
Speaker 1: very cheaply. You know, it might also look the same
18:35
Speaker 1: as we work somewhere else in the world, but look,
18:37
Speaker 1: we can do it for not a lot of money
18:39
Speaker 1: and not a lot of time, and that's going to
18:40
Speaker 1: help us grow more quickly than everyone else. Um. And
18:43
Speaker 1: as as we mentioned earlier, they talk a lot about
18:46
Speaker 1: how if they needed to get to profitability, they could
18:49
Speaker 1: just stop growing. And in fact, in they s one
18:51
Speaker 1: they cite a couple examples, including one in London where
18:55
Speaker 1: in the wake of Brexit they felt like maybe they
18:57
Speaker 1: should slow down growth, and in doing so they were
19:01
Speaker 1: able to show that their occupancy rates went up. So
19:03
Speaker 1: they're obviously looking for examples where they can point to
19:06
Speaker 1: and say, look, if things go poorly, we have a
19:10
Speaker 1: little bit of a place to fall back on, which is,
19:12
Speaker 1: if we stop growing so quickly, we won't lose money
19:14
Speaker 1: as quickly. Um. But yeah, while they think the going
19:17
Speaker 1: is good, they'd like to grow as quickly as possible.
19:18
Speaker 1: Reverseas Jeff, I do have to wonder, especially if most
19:21
Speaker 1: of their contracts releases and not ownership over these commercial properties,
19:27
Speaker 1: what the asset liability balance is, Like, I mean it's
19:30
Speaker 1: not secured. What are their assets that they could liquidate
19:33
Speaker 1: if they do have a problem. That's unclear. Um, they
19:38
Speaker 1: do own some, but they're all kind of complicated structures. Um.
19:42
Speaker 1: But but realistically, this is a it's a it's a
19:46
Speaker 1: very complicated large sublease business. Right. They lease off the space,
19:51
Speaker 1: they turn it around, they make it cool, um, and
19:54
Speaker 1: then they sublease it. And they've got average lease length
19:57
Speaker 1: of their leases are average fifteen years and there's member
20:01
Speaker 1: leases are average fifteen months, and so they are definitely mismatched.
20:05
Speaker 1: And you know, the over the past ten years, as
20:09
Speaker 1: they've been growing, it has worked because the office market
20:11
Speaker 1: has been expanding. Um. But that is has yet to
20:15
Speaker 1: really be tested. Jeff Langbaum, Senior read and Sirie Equity
20:19
Speaker 1: analyst for Bloomberg Intelligence. Ellen qwittt Uh, startup supporter for
20:22
Speaker 1: Bloomberg News, joining us from our San Francisco studios. Thank
20:25
Speaker 1: you so much for your time. We talk a lot
20:39
Speaker 1: about the war in technology, the war for the latest advancements,
20:43
Speaker 1: and a lot of times people talk about quantum computing,
20:47
Speaker 1: the idea of what's next, sort of what's the next
20:50
Speaker 1: see change within the computing industry. Luckily we have Dr
20:53
Speaker 1: Bob Sutor, he's vice president and IBM QUE Strategy and
20:57
Speaker 1: Ecosystem at IBM joining us here in bloom We're gonna
21:00
Speaker 1: active broker studios. So, Drs Sutor, I'm wondering, can you
21:04
Speaker 1: just start by explaining what is it that you do? Well,
21:08
Speaker 1: I'm in IBM Research. Okay, there we go. I mean,
21:11
Speaker 1: basically we talk about quanting quantum computing. What are we
21:15
Speaker 1: actually talking about here? Well, I mentioned IBM Research because
21:18
Speaker 1: we deal with the really, really, really new things that
21:21
Speaker 1: are going to be coming to market in five, ten,
21:24
Speaker 1: or sometimes twenty years. So quantum computing, which is what
21:28
Speaker 1: we do. UM is developing an entirely new type of
21:32
Speaker 1: hardware and software stack to solve problems that really today
21:37
Speaker 1: are just not tractable using existing systems. So give us
21:40
Speaker 1: an example. So let's take um um option um risk analysis. Right,
21:47
Speaker 1: So you're trying to figure out you have a portfolio
21:50
Speaker 1: and you could be a hedge fund, or this could
21:51
Speaker 1: be your retirement account. When you start thinking of the
21:54
Speaker 1: stocks and bonds and derivatives and all these different types
21:58
Speaker 1: of instruments, they're so many different connections between them and
22:02
Speaker 1: also things that are happening in the world. When you
22:04
Speaker 1: start to analyze these things, the combinations just grow exponentially,
22:09
Speaker 1: and here I literally mean exponentially and not just a
22:12
Speaker 1: lot all right. Current computers can't handle that. They can't
22:17
Speaker 1: handle that growth, and so they require either a tremendous,
22:21
Speaker 1: in fact ridiculous amount of memory to process or maybe
22:25
Speaker 1: only a million years to do the computation. This is
22:28
Speaker 1: a really important point and it's something that a lot
22:30
Speaker 1: of businesses are looking into, and even from a governmental standpoint,
22:33
Speaker 1: there have been proposals that perhaps regulation of banks, for example,
22:37
Speaker 1: should be done with quantum computing to basically abstract out
22:40
Speaker 1: what the potential risks could be given what you're seeing
22:43
Speaker 1: on the ground when it comes to current day application
22:47
Speaker 1: of some of these technologies, what are you seeing in
22:49
Speaker 1: terms of that So first quantum computing is several years away.
22:54
Speaker 1: I really need to emphasize that. So we are looking
22:57
Speaker 1: for the applications that can do better than cloud csicle
23:00
Speaker 1: computers in three to five to ten years. So this
23:04
Speaker 1: isn't a situation where you use a quantum computer today
23:07
Speaker 1: to help you. It's longer term. But people who have
23:12
Speaker 1: longer term research programs, who can invest in this and
23:15
Speaker 1: want to be first to market will get behind this.
23:18
Speaker 1: So I mentioned the financial services applications. Uh, there are
23:22
Speaker 1: some situations where quantum computing may help find new patterns
23:27
Speaker 1: and data, so to help AI, to help machine learning,
23:30
Speaker 1: and then also chemistry. There's always this idea that we
23:34
Speaker 1: want to find new drugs, discover new drugs. Now, when
23:37
Speaker 1: I hear drug discovery, it's almost like you're wandering around
23:39
Speaker 1: in a forest looking for the great drug. Let's compute
23:43
Speaker 1: that instead, right, Let's actually model the molecules exactly in
23:48
Speaker 1: a computer, so we can compute with them, we can
23:51
Speaker 1: manipulate them and figure out how they're going to work
23:53
Speaker 1: with you. It's quantum getting basically just really fast computer.
23:57
Speaker 1: It's a completely different type of computer. So it's not
24:01
Speaker 1: like your laptop or your phone from the very lowest level.
24:05
Speaker 1: It's completely different, which means all the software above it's
24:09
Speaker 1: completely different as well. Who's ahead in the race for
24:12
Speaker 1: the secret sauce when it comes to quantum computing? I mean, uh,
24:16
Speaker 1: we talk about the US versus China. Are we seeing
24:20
Speaker 1: a greater degree of development in China than the U
24:22
Speaker 1: S on this? On this front, well, we really can't tell,
24:25
Speaker 1: so I can't comment. I can only talk about what
24:27
Speaker 1: I know about um in for example, the United States
24:30
Speaker 1: and Europe. Um all of us are doing a tremendous
24:34
Speaker 1: amount of work. They're different quantum computing technologies. UM, I
24:38
Speaker 1: would say right now, and yes it's my organization, but
24:42
Speaker 1: I think IBM is ahead in terms of producing the
24:46
Speaker 1: quantum computers and making them available. We've had quantum computers online.
24:51
Speaker 1: I mean, people can go to the IBM q experience
24:53
Speaker 1: right now and use use a quantum computer. We've had
24:56
Speaker 1: them for three years on the cloud. Hundred forty people registered,
25:01
Speaker 1: So that's really interesting. That brings me to my next question.
25:04
Speaker 1: Are you finding the talent that you need to hire
25:08
Speaker 1: to bring into the fold who can do this work
25:11
Speaker 1: and pushes forward. We're finding some of it, but education
25:15
Speaker 1: is a big part of what we're trying to support
25:17
Speaker 1: right now, because if this is so different, if you
25:20
Speaker 1: think about all the software engineers out there, none of
25:23
Speaker 1: them a priori know how to code a quantum computer. Now,
25:28
Speaker 1: it turns out in many organizations there's the occasional quantum
25:31
Speaker 1: physicists who you can recruit, uh, But we're trying to
25:35
Speaker 1: train more in undergraduate classes. We're supporting graduate students um. This,
25:40
Speaker 1: in fact, though, I will say, is the most common
25:42
Speaker 1: question when we talk to clients, who should I hire?
25:45
Speaker 1: What sorts of people should I have and get on
25:48
Speaker 1: board now to help me with this quantum computing future?
25:52
Speaker 1: Which industry do you think will be most radically changed
25:56
Speaker 1: by the advent of some of this technology? First up,
26:00
Speaker 1: financial services, Second up all those things that relate to chemistry,
26:05
Speaker 1: so ultimately healthcare, but also material science, creating new alloys,
26:09
Speaker 1: all sorts of materials that people will see. Bring this
26:13
Speaker 1: down to the level of you know, when you go
26:15
Speaker 1: to buy clothes, is it something where you could potentially
26:17
Speaker 1: have a jacket that keeps all of your warmth in
26:21
Speaker 1: and yet is paper thin? Or I mean, what, what's
26:23
Speaker 1: what's the actual kind of application here to give people
26:26
Speaker 1: a tangible sense of how different things could look in
26:30
Speaker 1: their physical world. As a response to this, or in
26:33
Speaker 1: on the heels of this technological advance, well dime Lar Mercedes,
26:37
Speaker 1: for example, who is one of our partners in the
26:40
Speaker 1: ibm Q network. They're working on new battery technology. So
26:44
Speaker 1: future electric cars, if everything goes well with quantum computing,
26:48
Speaker 1: will be much more efficient and last much longer. And
26:52
Speaker 1: that's how you will see it. Most people in their
26:54
Speaker 1: day to day lives will not say, hey, I'm using
26:56
Speaker 1: a quantum computer to do this. They may see new shampoos. Yes,
26:59
Speaker 1: they may see new materials, new new textiles, um, new
27:03
Speaker 1: materials in their cars. Uh, you know, we may actually
27:07
Speaker 1: use quantum computers to create new materials to create even
27:10
Speaker 1: better quantum computers. What about cost wise? I mean, is
27:14
Speaker 1: it going to be cost prohibitive for anyone with the
27:16
Speaker 1: biggest companies to sort of engage with this technology at
27:19
Speaker 1: the outset? Uh? No, it won't be because it will
27:22
Speaker 1: be available on the cloud, So people will not be
27:24
Speaker 1: buying their own quantum computers. They will be accessing them
27:27
Speaker 1: over the cloud in different models. In fact, the IBMQ
27:30
Speaker 1: experience which I mentioned before, If you want to get
27:33
Speaker 1: up and started. It's no charge. The software we use
27:36
Speaker 1: is open source, there's no charge. I'm sure it's sort
27:39
Speaker 1: of a good tactic. In other words, get enough people
27:41
Speaker 1: in the fold and understanding what this is to have
27:44
Speaker 1: the ecosystem to keep it going and push it ahead.
27:47
Speaker 1: Dr Bob Sutor, thank you so much for being here,
27:49
Speaker 1: fascinating vice president of ibm Q Strategy and Ecosystem, joining
27:54
Speaker 1: us here in our eleven three oh studios. Thanks for
27:58
Speaker 1: listening to the Bloomberg P and L pod Cast. You
28:00
Speaker 1: can subscribe and listen to interviews at Apple Podcasts or
28:03
Speaker 1: whatever podcast platform you prefer. I'm Paul Sweeney. I'm on
28:06
Speaker 1: Twitter at pt Sweeney. I'm Lisa abram Woyds. I'm on
28:08
Speaker 1: Twitter at Lisa A. Bram wits one. Before the podcast,
28:11
Speaker 1: you can always catch us worldwide. I'm Bloomberg Radio